Tax-free savings allowance cut to £500 with HMRC rule | Personal Finance | Finance

With the new tax year approaching, savers are looking for the best possible saving strategy. But it might come at a high cost for those with an income above £50,270. The Personal Savings Allowance (PSA) lets most people earn interest up to £1,000 in interest without paying tax on it. The allowance you get depends on what rate of Income Tax you pay.

While basic rate taxpayers who earn less than £50,270, who pay 20% tax, can earn £1,000 in savings interest per year with no tax due on this, higher-rate (40%) taxpayers can only accrue up to £500 of savings interest before being taxed. Additional-rate taxpayers at 45% (earning over £125,140) do not get any allowance.

According to this HMRC rule, anyone earning between £50,271 and £125,140 will be able to gain only half the savings interest of what those earning less receive without owing tax on it..

If you’re a non-taxpayer, meaning you have less than £12,570 income per year, you may be able to earn as much as £18,570 in savings interest tax-free. But it depends on how much income you do have, whether from a pension, or from working, Money Saving Expert (MSE) explains.

Of course, these rules only apply to savings held in accounts outside ISAs. According to MSE founder Martin Lewis, there is an important caveat. For those looking to save strategically, they can put their savings in a tax-free Cash ISA instead.

He said: “The most important thing to note is that cash ISA interest doesn’t count towards your PSA, so you can earn it tax-free – and still have your full £1,000 (or £500) allowance.”

For higher-rate taxpayers, this makes a huge difference, because for every £100 interest they earn in normal savings, they only get £55, whereas in an ISA they get all the £100.

However, if you don’t have enough savings to be taxed, Lewis recommends to just go for the highest rate on the market – which is more often than not offered by a PSA rather than ISAs.